The government's Digital Britain industrial policy may fail
to meet its original goal unless it changes the way it values
broadband networks for business tax, a Computer Weekly
investigation has revealed.
The taxes and possible new levies on homes and small businesses
connected to fibre and wireless networks make access to broadband
more expensive than it need be, especially in rural areas.
The UK and Ireland are the only European Union members to tax
telecommunications networks.
Part of the formula for calculating the rateable value of a
broadband link depends on distance. Rural users pay more for
connections because network service providers pass on the cost of
the tax. This makes broadband connections unaffordable for many in
rural areas.
The Digital Britain policy promises to deliver data speeds of
2Mbps to every home, office and farm in the country. Figures from
communications regulator Ofcom suggest that up to 11%, or three
million premises will not be able to receive broadband without
state aid.
The government has proposed to expropriate some £200m from the
BBC's budget to convert TV and radio broadcasts from digital to
analogue to cover these costs.
But much of that money, which will be given to network service
providers to build connections, will go to pay business rate taxes
on long-distance connections. Some communities are unlikely ever to
get broadband, especially high-speed broadband over fibre.
Most network operators hope that the government will put 0% tax
(zero-rating) on fibre networks in the forthcoming Digital
Communications Bill, due in the Queen's speech in November.
But last week it emerged that the government was looking to tax
Wi-Fi hotspots and Wimax connections. Until now these have not been
levied. Moreover, the levy may be backdated to April 2005.
Many rural communities depend on these wireless technologies for
broadband, and many run on a not-for-profit basis. Some say the
proposed tax on their wireless networks would make them
unaffordable, especially if the levy is backdated.
Network owners acknowledge that the government's weak financial
position makes zero-rating difficult.
"This is a very sensitive issue," says one operator, speaking to
Computer Weekly anonymously. "The government has to balance the
desperate need for short-term cash against the long-term benefit
from economic growth that zero-rating would bring, both directly in
terms of investment in new fibre networks, and indirectly in terms
of investment in applications that depend on high speed
networks."
Taxing fibre
A spokesman at HM Revenue & Customs' Valuation Office Agency
(VOA), which sets the rates, said the tax, currently 48.5p in the
pound, is levied on what the VOA estimates as the operating profit
that the network owner could make if it rented it to a third
party.
The tax and how the VOA applies it to different network
scenarios has been the subject of negotiations between the VOA and
industry association the Broadband Stakeholders Group for years.
The VOA says talks with the group are on-going.
An unpublished 2006 report commissioned by the then Department
of Trade & Industry (DTI), seen by Computer Weekly, recommended
that the government zero-rate fibre networks for the business
tax.
The then responsible minister, Stephen Timms, who is now in
charge of the Digital Britain initiative, did not act on the
recommendation. Timms told Computer Weekly recently he had "no
further thoughts" on the matter.
The Caio Report, which looked at barriers to investment in
broadband considered the business rates issue, but it said only
that the VOA should provide "updated and revised guidance in the
light of both recent litigation and the anticipated growth of next
generation access networks".
In July this year David Hendon, business relations director in
the enterprise and business group at the Department of Business,
Innovation & Skills, told a parliamentary committee on
communications that its advice from the Department of Communities
and Local Government, which "owns" the business rate tax, was
against the recommendation. "If we were to zero-rate fibre, then we
would effectively undermine the whole basis of the rating system in
the UK," he said.
Barrier to new entrants
The present rating system was described as "the biggest single
barrier to joined-up investment in low-cost resilient UK broadband"
networks by Philip Virgo, spokesman for Eurim, a
parliamentary-industry discussion group.
The red tape of business rates also puts investors off. Tim
Smith, head of networks at mobile network operator Orange, says
dealing with business rates occupies more of his time than he
likes. Other network operators share his view.
Zero-rating broadband networks would help. But spokesmen for
cable TV network operator Virgin Media and fixed and mobile network
operator TalkTalk say it more important is to reduce the
uncertainty that surrounds the potential return on investment in
next generation networks.
Britain is not even on the charts in terms of fibre to the home,
and is slipping down the global broadband rankings. Does the
country really need to tax the future?